The federal government’s tax cuts kicked in during November, with millions of Australians up to $47 a week better off. The cuts were announced in the government’s latest budget and are designed to stimulate a struggling economy. But what should you be doing with your extra funds?
The tax cuts are being backdated to July 1, 2020, and under the changes, the top threshold for the 32.5 per cent tax rate will rise to $120,000 from $90,000, giving this group up to $47 a week extra. The top threshold for those on the 19 per cent rate will increase to $45,000 from $37,000. The low and middle-income tax offset of up to $1,080 will be extended for one more year. Receiving this offset is dependent on the size of your taxable income.
So how can you get the most out of your extra money?
Pay down your debts
One of the smartest things you can do is pay off any debts that are attracting a high interest rate, including credit-card debt or personal loans. It’s usually best to prioritise by paying off those debts with the highest rates first. Contributing more to paying these off will reduce your interest bill, potentially saving you thousands over time. Once you’ve paid them off, use the extra money from your tax cuts to build up an emergency fund so you don’t need to reach for your credit card next time you have to fund a major purchase.
Start a savings habit
RetireInvest Circular Quay adviser John Walker says what we do with any extra money we receive often comes down to our personal habits. “Many of us have a habit of not paying off credit card bills at the end of the month at which point there is no cost to you but when extended attracts a penalty interest rate of up to 20 per cent,” he says. “And then there’s the habit of saving, which like exercise, works when done regularly and started simply.”
Walker says the latest tax cuts make saving a regular amount easier. “Why not make a compulsory contribution to your future and save 10 per cent of your gross salary,” he says. “It’s just become easier with the latest tax cut and you are unlikely to miss that money if you’re putting it aside for your long-term wealth.”
Set up an investment plan
Leaving your money in the bank at the current record low interest rates is unlikely to generate the type of wealth you need for your financial future. Walker suggests setting up a savings program and placing the extra funds from the tax cuts into a managed fund of market-linked investments for a longer investment time frame, for example, a 10-year horizon. “This can be quite tax effective as the earnings on such a fund are likely to be in the form of capital gain upon which only half the gain is taxed when you cash it in,” he says.
Also note that managed funds typically distribute capital gains on the sale of underlying investments regularly. This can help smooth overall returns and avoid an excessive capital gain in any one particular year. Where assets are held for at least 12 months, you may be eligible for a discount on the capital gain.
You need to do your own research when setting up these types of investments so speaking to your financial adviser should be your first port of call.
Increase your super contributions
If you’re nearing retirement, Walker suggests directing the extra funds into your super fund. “Super is one of the most tax-effective ways to save for your future given that the earnings in the fund are subject to a maximum tax rate of only 15 per cent,” he says.
And remember, if you’re a low-to-middle income earner and you make an after-tax contribution to your super, you may be eligible for a super co-contribution from the government. Specifically, if you meet the criteria and put an extra $1000 into super, the government will contribute up to $500.
The benefits of property ownership
If you don’t yet own any property, given the low interest rates, you may want to consider getting a foot on the property ladder, either with an investment or with your own home. The extra funds from your tax cuts can go towards building a healthy deposit so you need to borrow less for your home loan.
What to consider when investing
Walker says what you do with your extra funds depends on your individual circumstances but to assist in any financial decision, he provides the following “filters” to help bring clarity to courses of action:
His final advice if you’re worried about your financial future however, is not to go out and spend your extra cash on an impulse buy. “Don’t go out and spend your money on another widget that, after the novelty has worn off, will sit in your garage for years until you end up chucking the thing out.”
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Taxation law is complex, and this information has been prepared as a guide only and does not represent taxation advice. Please see your tax adviser for independent taxation advice. The information provided is of a general nature and does not take into account your personal needs, financial circumstances or objectives. Before acting on this information, you should consider the appropriateness of the information, having regard to your needs, financial circumstances or objectives. Opinions expressed in this document are those of the authors only.